What Is E-Commerce? How Does It Work? Complete Guide[2024]

E-commerce (electronic commerce) is the exchange of goods and services and the transmission of funds and data over the internet. E-commerce relies on technology and digital platforms, including websites, mobile apps and social media to make buying and selling possible.

Advantages of E-Commerce

According to the U.S. Census Bureau, e-commerce sales totaled $253.1 billion during the first quarter of 2023, revealing that more businesses are embracing e-commerce. Here’s what you, too, can gain from e-commerce.

Global Marketing Reach

Unlike a physical store that limits a business to its geographical area, an e-commerce website allows you to reach customers anywhere. Once customers can place orders online and you can ship a product to their location or provide a service, there’s no limit to your reach.

Lower Operating Costs

Building an e-commerce website and maintaining it is cheaper than running a brick-and-mortar store. You won’t need to rent retail space or a warehouse or worry about building maintenance or property insurance. Plus, advertising online is cheaper, especially with organic blog posts and social media that can drive traffic to your site.

Convenience and Flexibility

E-commerce websites provide flexibility for their owners and customers. You can offer a wide selection of products while customers make round-the-clock purchases, regardless of their time zone or location. And as a business owner, you can earn even while sleeping.

Easier Management

Customer segmentation and other marketing and sales processes are easier for an e-commerce business. For instance, access to customer data (search and purchase history) combined with artificial intelligence (AI) will give you insight into your target market and help you streamline your marketing strategies, which increases your revenue. Also, you can expand your e-commerce business without the need to relocate or renovate a physical store.

Disadvantages of E-Commerce

Some businesses avoid e-commerce for the following reasons.

Limited Face-to-Face Interaction

Since there’s limited product experience, customers tend to buy products that don’t meet their expectations or are challenging to use. For instance, a shoe might not fit a customer, or they become frustrated when they find it hard to use a product. These expectation issues lead to buying indecisions or refunds that can mess with a store’s inventory or even cost it some money.

Technical Challenges

Since e-commerce websites rely on technology, if you experience glitches, a website crash, a cybersecurity attack or any of your integrated platforms (web builder, web hosting, inventory management software, etc.) experiences downtime, your business suffers. Your website won’t allow buying or selling, let alone completing a purchase.

Data Security Concerns

E-commerce websites often store customers’ card information to allow faster purchases in the future, so if a site is hacked, threat actors can acquire such information. Customer data is compromised, and the website loses sales from a damaged reputation. That’s if the store isn’t even closed down. Last year alone, e-commerce businesses lost $41 billion to fraud.

4 Major Types of E-Commerce

E-commerce takes several forms. A company can sell to its customers, other businesses or the government. Customers can also sell to businesses, government agencies or other customers. However, there are four primary types of e-commerce that describe the electronic transactions that can take place over the internet.

1. Business to Consumer (B2C)

This popular e-commerce model involves companies selling their products or services directly to the end user, the consumer who needs it.

2. Business to Business (B2B)

This e-commerce type refers to the exchange that occurs between businesses. Here, an e-commerce business sells to another business. An example is software-as-a-service, such as web hosting or accounting software for smooth business operations. B2B e-commerce can also be raw materials or machinery exchange over the internet.

3. Consumer to Consumer (C2C)

Some e-commerce platforms are like digital marketplaces connecting consumers. An example is eBay, which allows a consumer to list and sell their products to another consumer.

4. Consumer to Business (C2B)

For this type of e-commerce, consumers sell their products and services to businesses. For example, a photographer sells their photos to companies so that they can use them for ads or social media campaigns.

How E-Commerce Works

E-commerce uses electronic channels to connect buyers and sellers. It works like a physical store—customers visit your e-commerce store to browse your products and make a purchase. However, e-commerce involves back-and-forth communication between your website and its server host.

Typically, e-commerce follows these steps:

1. A business lists its products and services.
2. A customer browses the catalog to choose what they want and then adds it to the cart.
3. The customer pays for the item using any of the available payment options.
4. The business receives the order on its dashboard.
5. The payment is processed, and the order is approved.
6. An order manager sends the order to the fulfillment department or warehouse to authorize a dispatch.
7. The customer receives the notification of order approval and other details, including shipping and tracking information.
8. The business ships the product or renders the required service.

Top E-Commerce Platforms

There are several platforms for building your e-commerce store, such as Shopify, Squarespace, and Wix. Every website builder varies in terms of ease of use, price, features and customization capabilities, so it’s important to pinpoint which is right for your online store. The top e-commerce platforms are detailed below.

Squarespace

Squarespace has the features you need to run an e-commerce website, so you won’t need to install a plugin. Its e-commerce builder starts at $23 per month and offers you a wide range of free template designs. You can also customize your e-commerce website with CSS or JavaScript, and sell as many products as you want. Squarespace also offers e-commerce analytics and the ability to tag your products on Instagram.

You’ll also get a shipping calculator to calculate and show customers their shipping fees. You can also send automated emails to customers who abandon their carts. But don’t expect to get all these features on lower plans. Also, note that only the Commerce plans exempt businesses from the additional 3% fee on each transaction.

Shopify

Shopify provides what you need to launch your e-commerce store, even without design experience. This e-commerce website builder also enables smooth integration with up to 6,000 apps, making it easy to run your website. Its plans offer unlimited storage and bandwidth, multiple staff accounts, point-of-sale (POS) access, abandoned cart recovery, shipping discounts, free SSL certificate and shipping label printing. You can also sell as many products as you want.

Shopify’s higher plans offer advanced features such as analytics and reports, and you’ll pay lower fees on transactions, credit card processing and shipping. You can get started with its three-day trial opportunity.

Wix

Wix offers more than 500 free templates and allows you to customize your website with editing tools that make your website responsive on different devices. Depending on your plan, you can sell unlimited products, recover abandoned carts, manage inventory and complete payments. And you’ll get priority customer support, unlimited dropshipping, customized reports and a customer loyalty program to make running an e-commerce business easy and relate with your customers better.

This e-commerce website builder also has built-in SEO tools for improving your site’s ranking, and it integrates smoothly with hundreds of apps, allowing you to add features to your website without coding knowledge. Wix also offers a free version, but don’t expect much from it. Also, you’ll need to pay $59 per month to enjoy unlimited storage, which can withstand a content-heavy e-commerce store.

Sizes of Ecommerce Businesses

From small startups to large enterprises, ecommerce businesses can come in all sizes. Let’s look at the main four you’re likely to come across. 

Startup.

A startup is a business or project in the first stages of development, often built by an entrepreneur to pursue an innovative business model.

Typically a startup has less than 100 employees, however a startup is often defined not by size but by profitability. According to Alex Wilhelm, writer for TechCrunch, a company is no longer considered a startup after it reaches a $50 million revenue run rate or is worth more than $500 million, on paper or otherwise.

Small business.

Small businesses are sole proprietorships, partnerships or corporations that sell products or services and make less money and have fewer employees than large multinational corporations. The U.S. Small Business Administration further defines a small business in terms of employment (from 100 to over 1,500 employees) or average annual receipts over time (ranging from $1 million to over $40 million). 

Mid-market.

According to Sangoma, small and medium-sized enterprises (SMEs), also known as “mid-market,” businesses, typically have between 101-500 employees and genrate between $10 million and $1 billion in annual revenue.  

Enterprise. 

Large enterprise businesses can have over 1000 employees and usually generate over $1 billion in annual revenue.

Since the beginning of 2020, 45% of ecommerce software buying activity has come from enterprise-level companies.

Types of Ecommerce

Generally, there are seven main models of ecommerce that businesses can be categorized into:

• B2C.
• B2B.
• C2C.
• D2C.
• C2B.
• B2A.
• C2A.

Let’s review each type of electronic commerce in a bit more detail.

1. Business-to-Consumer (B2C).

B2C ecommerce encompasses transactions made between a business and a consumer. B2C is one of the most popular sales models in the ecommerce context. For example, when you buy shoes from an online retailer, it’s a business-to-consumer ecommerce transaction.

2. Business-to-Business (B2B).

Unlike B2C, B2B ecommerce encompasses sales made between businesses, such as a manufacturer and a wholesaler or retailer. B2B is not consumer-facing and happens only between businesses.

3. Consumer-to-Consumer (C2C).

One of the earliest forms of ecommerce, consumer-to-customer ecommerce relates to the sale of products or services between customers. This includes C2C selling relationships, such as those seen on eBay or Amazon.

4. Direct-to-Consumer (D2C).

A newer model of ecommerce, D2C refers to a business that sells products directly to the end customer instead of going through a retailer, distributor or wholesaler.

One common example of D2C ecommerce is a subscription-based brand such as Netflix or Dollar Shave Club. 

5. Consumer-to-Business (C2B).

C2B reverses the traditional retail model, meaning individual consumers make their products or services available for business buyers.

One example of a C2B ecommerce business is iStock, an online store where stock photos are available for purchase directly from different photographers.

6. Business-to-Administration (B2A).

B2A covers the transactions made between online businesses and administrations. An example would be the products and services related to legal documents, social security, etc.

7. Consumer-to-Administration (C2A).

C2A is similar to B2A, but instead, consumers sell products or services to an administration. C2A can include online consulting for education, online tax preparation, etc.

Examples of Ecommerce

Of course, to run an ecommerce business, you have to have something to sell. 

But unlike brick-and-mortar businesses, ecommerce retail can take on a number of forms, with transactions involving a variety of products and services.

Let’s dive into three examples of what you can sell online:

Sell physical goods. 

Think of your favorite clothing, home decor or electronics brand — these are all prime examples of selling physical goods online. 

Physical goods are any tangible products that can be bought and sold in-store or online. Most often, these types of ecommerce businesses will be either B2C or D2C brands, but even some B2B vendors are also in the physical goods category.

Sell digital goods. 

Whether you’re a seasoned online merchant or an aspiring entrepreneur, digital products are a promising avenue for selling online. 

Digital products can come in the form of digital files such as templates and tools or online classes, or they can be downloadable products such as printable artwork, music or infographics. 

Sell services.

Selling services entails offering a specialized service, such as freelance writing, influencer marketing or online coaching in exchange for compensation. 

Many service-based businesses are B2B, however some B2C brands, such as Fiverr, offer online services as well. 

Growth of Ecommerce

Ecommerce has come a long way since the CompuServe launch in 1969. 

Driven by changes in technology and global circumstances, ecommerce is growing and shows no sign of stopping.

• Sales in online stores are expected to reach 22% of global retail sales by 2023, compared to 14.1% in 2019.
• It is estimated that by 2024, digital wallets will account for over half of total ecommerce payment volumes.

Companies can easily reach new customers.

Ecommerce also makes it easier for companies to reach new, global customers. An online store isn’t tied to a single geographic location — it’s open and available to any and all customers who visit it online.

With the added benefits of social media advertising, email marketing and SEO (search engine optimization), brands have the potential to connect with massive target audiences who are in a ready-to-buy mindset.

Lower operational costs.

Without a need for a physical storefront (and employees to staff it), ecommerce retailers can launch stores with minimal operating costs. And those that run a dropshipping business can even minimize upfront investment costs.

As sales increase, brands can easily scale up their operations without making major property investments or hiring a large workforce — this means higher margins overall.

Personalized experiences.

With the help of automation and rich customer profiles, you can deliver highly personalized online experiences for your ecommerce customer base.

Showcasing relevant products based on past purchase behavior, for example, can lead to higher average order value (AOV) and make the shopper feel like you truly understand their unique needs.

Access to New Technologies. 

With a physical store alone, you may find your options are limited when it comes to innovation. However, as the ecommerce ecosystem continues to mature and improve, your business will have access to the latest technologies to help streamline business processes. 

With a variety of apps and integrations at your fingertips, you’ll be able to improve workflows, better execute your marketing strategy and improve the overall shopping experience.

Disadvantages of Ecommerce

Although modern ecommerce is increasingly flexible today, it still has its own setbacks.

Here are some of the downsides to ecommerce retail.

Limited interactions with customers.

Without being face-to-face, it can be harder to understand the wants, needs and concerns of your ecommerce customers.

There are still ways to gather this data (surveys, customer support interactions, etc.), but it may take a bit more work than talking with shoppers in person on a day-to-day basis.

Technology breakdowns can impact ability to sell.

If your ecommerce website is slow, broken or unavailable to customers, this may impact your ability to make sales. Site crashes and technology failures can damage relationships with customers and negatively impact your bottom line.

No ability to test or try on.

For customers who want to get hands-on with a product (especially in the realm of physical goods like clothing, shoes and beauty products) before adding it to their shopping cart, the ecommerce experience can be limiting.

Bottom Line

E-commerce is fast growing, with transactions completed on mobile devices in 2022 amounting to $387 billion and desktop purchases almost doubling that amount at $703.2 million. Still, e-commerce can be challenging. So, consider its benefits and drawbacks, and work on incorporating important features on your website. You can also glean from successful e-commerce examples to build yours.